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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-48863) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 13
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 15
VANGUARD BALANCED INDEX FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER
(610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 7, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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VANGUARD(R)
BALANCED INDEX
FUND
Prospectus
April 7, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP(R)]
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VANGUARD BALANCED INDEX FUND
Prospectus
April 7, 2000
A Balanced Mutual Fund
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CONTENTS
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1 FUND PROFILE 18 FINANCIAL HIGHLIGHTS
3 ADDITIONAL INFORMATION 20 INVESTING WITH VANGUARD
4 AN INTRODUCTION TO INDEX FUNDS 20 Services and Account Features
5 A WORD ABOUT RISK 21 Types of Accounts
5 WHO SHOULD INVEST 22 Buying Shares
6 PRIMARY INVESTMENT STRATEGIES 24 Redeeming Shares
13 THE FUND AND VANGUARD 28 Transferring Registration
14 INVESTMENT ADVISER 28 Fund and Account Updates
15 DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)
17 SHARE PRICE
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide whether the Fund is the right investment
for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard Balanced Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.
INVESTMENT STRATEGIES
The Fund typically invests 60% of its assets in common stocks and 40% in bonds.
The stock portion of the Fund seeks to match the total return of the Wilshire
5000 Total Market Index, a widely recognized measure for the U.S. stock market.
The Fund's bond portion seeks to replicate the returns of the Lehman Brothers
Aggregate Bond Index, a measure of regularly traded, U.S. investment-grade
bonds. There is no assurance that the Fund will achieve its stated objective.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:
- - Stock market risk, which is the chance that stock prices in general will
decline over short or even long periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline.
- - Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for the Fund.
- - Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for the Fund.
- - Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
- - Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date because the underlying mortgages have been
paid off ahead of schedule. If a bond is called, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- - Index sampling risk, which is the chance that the securities selected for
the Fund will not provide investment performance matching that of the
index. Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
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2
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ANNUAL TOTAL RETURNS
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1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
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Total return figures do not reflect the annual account maintenance fee of $10.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 12.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.57% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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SINCE
1 YEAR 5 YEARS INCEPTION*
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Vanguard Balanced Index Fund** 13.61% 19.13% 14.89%
Balanced Composite Index+ 13.54 19.30 15.19
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond Index -0.82 7.73 6.57
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*November 9, 1992.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index and 40%
Lehman Brothers Aggregate Bond Index.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000) $2.50/quarter*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
*The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less than the
fee, fractional shares will be automatically redeemed to make up the
difference.
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3
The Fund reserves the right to deduct a transaction fee of 0.08% from an
investor's cumulative purchases over $100 million. Where it applies, the fee is
retained by the Fund to offset transaction costs of investing large new
contributions into the market. The fee is not paid to Vanguard and is not a
sales charge.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Balanced Index Fund's expense ratio in fiscal year 1999 was
0.20%, or $2 per $1,000 of average net assets. The average balanced mutual fund
had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
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The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$20 $64 $113 $255
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly $3,000; $1,000 for IRAs and custodial
in March, June, September, and accounts for minors
December; capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
Balanced
INVESTMENT ADVISER
The Vanguard Group, Inc., Valley Forge, VANGUARD FUND NUMBER
Pa., since inception 02
INCEPTION DATE CUSIP NUMBER
November 9, 1992 921931101
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$3.1 billion VBINX
SUITABLE FOR IRAS
Yes
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4
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
The target index may be a group of stocks or bonds, or a combination of
stocks and bonds. Balanced index funds hold a mix of stocks and bonds.
Index funds do not have active managers who buy and sell securities based
on research and analysis. Rather, index funds are passively managed by the
adviser who seeks to match a market benchmark.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition should not perform dramatically better or worse than
their benchmarks.
- - Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually very low.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
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5
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking moderate current income and long-term growth of principal
and income.
- - You are seeking a diversified combination of U.S. stocks and bonds.
- - You are willing to invest for the long term--at least five years.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
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6
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PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of capital and
income. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, credit risk, and prepayment risk--faced by
investors in the Fund. The Fund's Board of Trustees, which oversees the
management of the Fund, may change the Fund's investment objective or strategies
in the interest of shareholders, without a shareholder vote.
MARKET EXPOSURE
STOCKS
About 60% of the Fund's assets are invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term. (The S&P 500 Index is shown here because this benchmark,
unlike the Wilshire 5000 Index, has been in existence for all of the periods
shown.)
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average
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7
(from 1928 through 1932) to 28.6% (from 1995 through 1999). These average
returns reflect past performance on common stocks; you should not regard them as
an indication of future returns from either the stock market as a whole or this
Fund in particular, which invests approximately 40% of its assets in bonds.
While the Fund's holdings will typically include the 500 largest stocks in
the Wilshire 5000 Index, they will not include all of the securities in the
Index. Instead, the Fund will invest in a representative sample of stocks.
Keep in mind, too, that while the Wilshire 5000 Index is dominated by
large-cap stocks (those contained in the S&P 500 Index), small- and mid-cap
issues are also represented. The Fund's stock holdings are adjusted on a regular
basis to reflect the Wilshire 5000 Index. As of December 31, 1999, about 22.16%
of the market value of the Wilshire 5000 Index was comprised of securities that
were not in the S&P 500 Index. Stocks of smaller companies have historically
been more volatile than--and at times have performed quite differently from--the
stocks of larger companies.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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BONDS
About 40% of the Fund's assets are invested in bonds, in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE MODERATE FOR SHORTER-TERM BOND
FUNDS AND HIGH FOR LONGER-TERM BOND FUNDS. BECAUSE THE FUND INVESTS IN A
PORTFOLIO OF BONDS WITH AN INTERMEDIATE AVERAGE MATURITY (5-10 YEARS),
INTEREST RATE RISK IS MODERATE.
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8
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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assumes a 7% yield.
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These figures are for illustration only and should not be regarded as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR
LONG-TERM BOND FUNDS.
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED BONDS, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING PERIODS OF FALLING
INTEREST RATES, A MORTGAGE-BACKED BOND ISSUER WILL "CALL"--OR REPAY--A
HIGHER-YIELDING BOND BEFORE ITS MATURITY DATE. IF A BOND IS CALLED, THE
FUND WOULD LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE APPRECIATION, AND
WOULD BE FORCED TO REINVEST THE UNANTICIPATED PROCEEDS AT A LOWER INTEREST
RATE. AS A RESULT, THE FUND WOULD EXPERIENCE A DECLINE IN INCOME.
Since the Fund invests only a portion of its assets in mortgage-backed
bonds, the risk to the Fund is limited.
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9
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The weighted average credit quality of the Fund's holdings,
as rated by Moody's Investors Service, as of December 31, 1999, was Aa1.
To a limited extent, the Fund is also exposed to event risk, which is the
chance that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring or other corporate event.
Finally, because stock and bond prices often move in different directions,
the Fund's bond holdings help to dampen--but not eliminate--some of the stock
market volatility experienced by the Fund. Likewise, changes in interest rates
may not have as dramatic an effect on the Fund as they would on a fund made up
entirely of bonds.
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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hopes of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
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SECURITY SELECTION
INDEXING METHODS
In seeking to track a particular index, a fund may use one of two indexing
methods to select the stocks or bonds it invests in.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. For
example, if 5% of the S&P 500 Index were made up of the stock of a specific
company, a fund tracking that index would invest about 5% of its assets in that
company.
Other index funds may use a different selection process. Because it would
be impractical to buy and sell all of the securities represented (the Wilshire
5000 Index, for example, included more than 7,000 stocks as of December 31,
1999), many funds tracking these larger indexes use a "sampling" technique.
Using a sophisticated computer program, these funds select securities that will
recreate their target indexes in terms of industry, size, and other
characteristics. For instance, if 10% of the Wilshire 5000 Index were made up of
utility stocks, the Balanced Index Fund would allocate about 10% of its stock
investment to the utility stocks of the index with similar characteristics.
[FLAG] THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED WILL NOT PROVIDE INVESTMENT PERFORMANCE MATCHING THAT
OF THE TARGET INDEXES. INDEX SAMPLING RISK SHOULD BE LOW.
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10
STOCKS
The Fund's common stock portfolio is designed to have investment characteristics
that parallel those of the Wilshire 5000 Index. The Fund is expected to
replicate approximately 1,000 of the largest securities in the Wilshire 5000
Index as measured by market capitalization, plus a representative sample of the
remainder, which are selected primarily on the basis of market capitalization,
industry weightings, and other fundamental characteristics. Typically, the Fund
holds a total of between 3,000 and 3,500 stocks.
BONDS
The Fund's bond portfolio is designed to have investment characteristics that
parallel those of the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index that encompasses five major classes of investment-grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, mortgage-backed securities, international
dollar-denominated bonds, and asset-backed securities with maturities greater
than one year. The Fund will invest in a representative sample of fixed-income
securities in the index, which, taken together, are expected to perform
similarly to the index. These securities are described further as follows:
- - U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
- - Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
- - Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association (FNMA), often referred to as "Fannie
Mae," and the Federal Housing Authority (FHA). GNMA bonds are guaranteed by
the full faith and credit of the U.S. government as to the timely payment
of principal and interest; bonds issued by other government agencies are
not. (Note: The Balanced Index Fund may also invest in conventional
mortgage-backed securities, which are packaged by private corporations and
are not guaranteed by the U.S. government.)
- - International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
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11
- - Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 9.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and the Fund will limit corporate substitutions to
approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.
FUND CHARACTERISTICS
STOCKS
The following table provides a snapshot of some financial characteristics of the
Fund's stock holdings as of December 31, 1999.
- --------------------------------------------------------------------------------
PRICE/EARNINGS EARNINGS DIVIDEND PRICE/BOOK
RATIO GROWTH RATE YIELD RATIO
- --------------------------------------------------------------------------------
27.40 17.30% 1.10% 5.00
- --------------------------------------------------------------------------------
- - Price/earnings ratio is the current price of a stock, divided by its
per-share earnings (profits) from the past year. A stock selling for $20,
with earnings of $2 per share, has a price/earnings ratio of 10.
- - Earnings growth rate is the average annual rate, expressed as a percentage,
of growth in earnings over the past five years for the stocks now in a
fund.
- - Dividend yield is current income (interest or dividends) earned by an
investment, expressed as a percentage of the investment's price.
- - Price/book ratio is the current price of a stock, divided by its net worth,
or book value, per share. For a fund, this ratio is used to mean the
weighted average price/book ratio of the stocks held by the fund.
BONDS
The following table provides a snapshot of the financial characteristics of the
Fund's bond holdings as of December 31, 1999.
- --------------------------------------------------------------------------------
NUMBER OF AVERAGE AVERAGE AVERAGE
ISSUES MATURITY QUALITY DURATION
- --------------------------------------------------------------------------------
449 9 years Aa1 5 years
- --------------------------------------------------------------------------------
- - Number of issues is an indicator of diversification. The more separate
issues a fund holds, the less susceptible it is to a price decline stemming
from the problems of a particular issue.
<PAGE>
12
- - 30-day yield is a snapshot of a fund's income. The yield, expressed as a
percentage of the fund's net asset value, is based on its income, net of
its operating expenses, over the past 30 days and is annualized, or
projected forward for the coming year.
- - Average maturity is the average length of time until bonds held by a fund
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a fund's share price will fluctuate in response
to changes in market interest rates.
- - Weighted average quality is an indicator of credit risk. This figure is the
average of the ratings assigned to a fund's securities holdings by
credit-rating agencies. The agencies make their judgment after appraising
an issuer's ability to meet its obligations. Quality is graded on a scale,
with Aaa or AAA indicating the most creditworthy bond issuers and A-1 or
MIG-1 indicating the most creditworthy issuers of money market securities.
The Fund's weighted average quality is based on the market value of the
bonds held by the Fund.
- - Average duration is an estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price
could shift, multiply the fund's duration by the change in rates. If
interest rates rise by one percentage point, the share price of a fund with
an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the fund's share price would rise by about
5%.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 25%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately 95%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
ACCOUNT MAINTENANCE FEE
Vanguard assesses an account maintenance fee on index fund shareholders whose
account balances are below $10,000 (for any reason, including a decline in the
value of the Fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the costs of maintaining accounts more equitably among
shareholders. The account maintenance fee is $2.50 per quarter, deducted from
the quarterly dividend, which usually is distributed during the last two weeks
of each calendar quarter. If the fee is deducted from your dividend
distribution, you will still be taxed on the full amount of your dividend
(unless you hold your shares through a nontaxable account). If you are due a
dividend that
<PAGE>
13
is less than the fee, fractional shares will be automatically redeemed to make
up the difference. This fee cannot be prepaid.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in U.S. common stocks and bonds, the Fund may make certain
other kinds of investments to achieve its objective. The Fund may invest in
fixed-income securities not in the target index (non-public, investment grade
securities--generally referred to as 144A securities--as well as smaller public
issues or medium term notes not included in the index due to their size). The
vast majority of these securities will have characteristics and risks similar to
those in the target index. The Fund may also purchase money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund,
reduce transaction costs, or add value when these instruments are favorably
priced.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest, to a limited extent, in stock and bond futures
and options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $540 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Core Management and Fixed Income
Groups. As of the fiscal year ended December 31, 1999, Vanguard served as
adviser for about $371.4 billion in assets. Vanguard manages the Fund on an
at-cost basis, subject to the control of the Trustees and officers of the Fund.
For the fiscal year ended December 31, 1999, the investment advisory expenses
represented an effective annual rate of approximately 0.01%.
The adviser is authorized to choose brokers-dealers to handle the purchase
and sale of the Fund's securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
<PAGE>
15
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individuals primarily responsible for overseeing the Fund's investments are:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing investment policy and strategy
since joining the company in 1987; has served as the portfolio manager for the
stock portion of the Fund since inception; A.B., Dartmouth College; M.B.A.,
University of Chicago.
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
joining the company in 1981; has been responsible for overseeing the portfolio
management of the bond portion of the Fund since inception; B.A., Lafayette
College; M.B.A., Pennsylvania State University.
FELIX B. LIM, has worked in investment management since completing his education
in 1996; joined Vanguard in January 1999; worked as a credit analyst until
January 2000; B.A. and M.S., University of Pennsylvania (Wharton School).
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year. You can receive distributions of income dividends or capital gains in
cash, or you can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
<PAGE>
16
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
17
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is BALANCED.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
18
- --------------------------------------------------------------------------------
VANGUARD BALANCED INDEX FUND
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $18.48 $16.29 $13.92 $12.77 $10.34
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .54 .520 .50 .45
Net Realized and Unrealized Gain
(Loss) on Investments 1.88 2.33 2.525 1.26 2.48
-----------------------------------------
Total from Investment Operations 2.46 2.87 3.045 1.76 2.93
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.58) (.54) (.530) (.49) (.45)
Distributions from Realized Capital
Gains (.14) (.14) (.145) (.12) (.05)
-----------------------------------------
Total Distributions (.72) (.68) (.675) (.61) (.50)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $20.22 $18.48 $16.29 $13.92 $12.77
================================================================================
TOTAL RETURN* 13.61% 17.85% 22.24% 13.95% 28.64%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to
Average Net Assets 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate 29% 25% 18% 37%** 16%
================================================================================
*Total return figures do not reflect the annual account maintenance fee of $10.
**Turnover rate excluding in-kind redemptions was 30%.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $18.48 per share.
During the year, the Fund earned $0.58 per share from investment income
(interest and dividends) and $1.88 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.72 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.46 per share) minus the distributions ($0.72 per share)
resulted in a share price of $20.22 at the end of the year. This was a increase
of $1.74 per share (from $18.48 at the beginning of the year to $20.22 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 13.61% for the year.
As of December 31, 1999, the Fund had $3.1 billion in net assets. For the year,
its expense ratio was 0.20% ($2 per $1,000 of net assets); and its net
investment income amounted to 3.18% of its average net assets. It sold and
replaced securities valued at 29% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
19
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
Note: Limitations do apply; see page 24.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOKLET]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
20
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
21
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-02
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
22
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Balanced Index Fund-02
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
23
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 27.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE>
24
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
25
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
<PAGE>
26
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or members firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back
into the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
<PAGE>
27
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
<PAGE>
28
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances. Bonds rated in one of the four highest categories are
considered "investment grade."
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform-- a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Balanced Index Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Fund (including the SAI) at
the SEC's Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act
file number: 811-7023
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P002N-04/07/2000
<PAGE>
VANGUARD(R)
BALANCED INDEX
FUND
Participant Prospectus
April 7, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP(R)]
<PAGE>
VANGUARD BALANCED INDEX FUND
Participant Prospectus
April 7, 2000
A Balanced Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 14 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 15 SHARE PRICE
4 AN INTRODUCTION TO INDEX FUNDS 16 FINANCIAL HIGHLIGHTS
4 A WORD ABOUT RISK 18 INVESTING WITH VANGUARD
5 WHO SHOULD INVEST 19 ACCESSING FUND INFORMATION BY
COMPUTER
5 PRIMARY INVESTMENT STRATEGIES
GLOSSARY (inside back cover)
13 THE FUND AND VANGUARD
13 INVESTMENT ADVISER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide whether the Fund is the right investment
for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Balanced Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.
INVESTMENT STRATEGIES
The Fund typically invests 60% of its assets in common stocks and 40% in bonds.
The stock portion of the Fund seeks to match the total return of the Wilshire
5000 Total Market Index, a widely recognized measure for the U.S. stock market.
The Fund's bond portion seeks to replicate the returns of the Lehman Brothers
Aggregate Bond Index, a measure of regularly traded, U.S. investment-grade
bonds. There is no assurance that the Fund will achieve its stated objective.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:
- - Stock market risk, which is the chance that stock prices in general will
decline over short or even long periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline.
- - Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for the Fund.
- - Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for the Fund.
- - Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
- - Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date because the underlying mortgages have been
paid off ahead of schedule. If a bond is called, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- - Index sampling risk, which is the chance that the securities selected for
the Fund will not provide investment performance matching that of the
index. Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
<PAGE>
2
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.57% (quarter ended September 30, 1998).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Balanced Index Fund 13.61% 19.13% 14.89%
Balanced Composite Index** 13.54 19.30 15.19
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond Index -0.82 7.73 6.57
- --------------------------------------------------------------------------------
*November 9, 1992.
**Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index and 40%
Lehman Brothers Aggregate Bond Index.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
The Fund reserves the right to deduct a transaction fee of 0.08% from an
investor's cumulative purchases over $100 million. Where it applies, the fee is
retained by the Fund to offset transaction costs of investing large new
contributions into the market. The fee is not paid to Vanguard and is not a
sales charge.
<PAGE>
3
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Balanced Index Fund's expense ratio in fiscal year 1999 was
0.20%, or $2 per $1,000 of average net assets. The average balanced mutual fund
had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
- --------------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly Balanced
in March, June, September, and
December; capital gains, if any, are VANGUARD FUND NUMBER
distributed annually in December 02
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Inc., Valley Forge, Pa., 921931101
since inception
TICKER SYMBOL
INCEPTION DATE VBINX
November 9, 1992
NET ASSETS AS OF DECEMBER 31, 1999
$3.1 billion
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
<PAGE>
4
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
The target index may be a group of stocks or bonds, or a combination of
stocks and bonds. Balanced index funds hold a mix of stocks and bonds.
Index funds do not have active managers who buy and sell securities based
on research and analysis. Rather, index funds are passively managed by the
adviser who seeks to match a market benchmark.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition should not perform dramatically better or worse than
their benchmarks.
- - Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually very low.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
- --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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<PAGE>
5
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking moderate current income and long-term growth of principal
and income.
- - You are seeking a diversified combination of U.S. stocks and bonds.
- - You are willing to invest for the long term--at least five years.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
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PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of capital and
income. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, credit risk, and prepayment risk--faced by
investors in the Fund. The Fund's Board of Trustees, which
<PAGE>
6
oversees the management of the Fund, may change the Fund's investment objective
or strategies in the interest of shareholders, without a shareholder vote.
MARKET EXPOSURE
STOCKS
About 60% of the Fund's assets are invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term. (The S&P 500 Index is shown here because this benchmark,
unlike the Wilshire 5000 Index, has been in existence for all of the periods
shown.)
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular, which invests
approximately 40% of its assets in bonds.
While the Fund's holdings will typically include the 500 largest stocks in
the Wilshire 5000 Index, they will not include all of the securities in the
Index. Instead, the Fund will invest in a representative sample of stocks.
Keep in mind, too, that while the Wilshire 5000 Index is dominated by
large-cap stocks (those contained in the S&P 500 Index), small- and mid-cap
issues are also represented. The Fund's stock holdings are adjusted on a regular
basis to reflect the Wilshire 5000 Index. As of December 31, 1999, about 22.16%
of the market value of the Wilshire 5000 Index was comprised of securities that
were not in the S&P 500 Index. Stocks of smaller companies have historically
been more volatile than--and at times have performed quite differently from--the
stocks of larger companies.
<PAGE>
7
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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BONDS
About 40% of the Fund's assets are invested in bonds, in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE MODERATE FOR SHORTER-TERM BOND
FUNDS AND HIGH FOR LONGER-TERM BOND FUNDS. BECAUSE THE FUND INVESTS IN A
PORTFOLIO OF BONDS WITH AN INTERMEDIATE AVERAGE MATURITY (5-10 YEARS),
INTEREST RATE RISK IS MODERATE.
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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
<PAGE>
8
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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assumes a 7% yield.
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These figures are for illustration only and should not be regarded as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR
LONG-TERM BOND FUNDS.
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED BONDS, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING PERIODS OF FALLING
INTEREST RATES, A MORTGAGE-BACKED BOND ISSUER WILL "CALL"--OR REPAY--A
HIGHER-YIELDING BOND BEFORE ITS MATURITY DATE. IF A BOND IS CALLED, THE
FUND WOULD LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE APPRECIATION, AND
WOULD BE FORCED TO REINVEST THE UNANTICIPATED PROCEEDS AT A LOWER INTEREST
RATE. AS A RESULT, THE FUND WOULD EXPERIENCE A DECLINE IN INCOME.
Since the Fund invests only a portion of its assets in mortgage-backed
bonds, the risk to the Fund is limited.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The weighted average credit quality of the Fund's holdings,
as rated by Moody's Investors Service, as of December 31, 1999, was Aa1.
To a limited extent, the Fund is also exposed to event risk, which is the
chance that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring or other corporate event.
Finally, because stock and bond prices often move in different directions,
the Fund's bond holdings help to dampen--but not eliminate--some of the stock
market volatility experienced by the Fund. Likewise, changes in interest rates
may not have as dramatic an effect on the Fund as they would on a fund made up
entirely of bonds.
<PAGE>
9
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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hopes of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
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SECURITY SELECTION
INDEXING METHODS
In seeking to track a particular index, a fund may use one of two indexing
methods to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. For
example, if 5% of the S&P 500 Index were made up of the stock of a specific
company, a fund tracking that index would invest about 5% of its assets in that
company.
Other index funds may use a different selection process. Because it would
be impractical to buy and sell all of the securities represented (the Wilshire
5000 Index, for example, included more than 7,000 stocks as of December 31,
1999), many funds tracking these larger indexes use a "sampling" technique.
Using a sophisticated computer program, these funds select securities that will
recreate their target indexes in terms of industry, size, and other
characteristics. For instance, if 10% of the Wilshire 5000 Index were made up of
utility stocks, the Balanced Index Fund would allocate about 10% of its stock
investment to the utility stocks of the index with similar characteristics.
[FLAG] THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED WILL NOT PROVIDE INVESTMENT PERFORMANCE MATCHING THAT
OF THE TARGET INDEXES. INDEX SAMPLING RISK SHOULD BE LOW.
STOCKS
The Fund's common stock portfolio is designed to have investment characteristics
that parallel those of the Wilshire 5000 Index. The Fund is expected to
replicate approximately 1,000 of the largest securities in the Wilshire 5000
Index as measured by market capitalization, plus a representative sample of the
remainder, which are selected primarily on the basis of market capitalization,
industry weightings, and other fundamental characteristics. Typically, the Fund
holds a total of between 3,000 and 3,500 stocks.
BONDS
The Fund's bond portfolio is designed to have investment characteristics that
parallel those of the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index that encompasses five major classes of investment-grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, mortgage-backed securities, international
dollar-denominated bonds, and asset-backed securities with maturities greater
than one year. The Fund will invest in a representative sample of fixed-income
securities in
<PAGE>
10
the index, which, taken together, are expected to perform similarly to the
index. These securities are described further as follows:
- - U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
- - Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
- - Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association (FNMA), often referred to as "Fannie
Mae," and the Federal Housing Authority (FHA). GNMA bonds are guaranteed by
the full faith and credit of the U.S. government as to the timely payment
of principal and interest; bonds issued by other government agencies are
not. (Note: The Balanced Index Fund may also invest in conventional
mortgage-backed securities, which are packaged by private corporations and
are not guaranteed by the U.S. government.)
- - International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
- - Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 8.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and the Fund will limit corporate substitutions to
approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.
<PAGE>
11
FUND CHARACTERISTICS
STOCKS
The following table provides a snapshot of some financial characteristics of the
Fund's stock holdings as of December 31, 1999.
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PRICE/EARNINGS EARNINGS DIVIDEND PRICE/BOOK
RATIO GROWTH RATE YIELD RATIO
- --------------------------------------------------------------------------------
27.40 17.30% 1.10% 5.00
- --------------------------------------------------------------------------------
- - Price/earnings ratio is the current price of a stock, divided by its
per-share earnings (profits) from the past year. A stock selling for $20,
with earnings of $2 per share, has a price/earnings ratio of 10.
- - Earnings growth rate is the average annual rate, expressed as a percentage,
of growth in earnings over the past five years for the stocks now in a
fund.
- - Dividend yield is current income (interest or dividends) earned by an
investment, expressed as a percentage of the investment's price.
- - Price/book ratio is the current price of a stock, divided by its net worth,
or book value, per share. For a fund, this ratio is used to mean the
weighted average price/book ratio of the stocks held by the fund.
BONDS
The following table provides a snapshot of the financial characteristics of the
Fund's bond holdings as of December 31, 1999.
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NUMBER OF AVERAGE AVERAGE AVERAGE
ISSUES MATURITY QUALITY DURATION
- --------------------------------------------------------------------------------
449 9 years Aa1 5 years
- --------------------------------------------------------------------------------
- - Number of issues is an indicator of diversification. The more separate
issues a fund holds, the less susceptible it is to a price decline stemming
from the problems of a particular issue.
- - 30-day yield is a snapshot of a fund's income. The yield, expressed as a
percentage of the fund's net asset value, is based on its income, net of
its operating expenses, over the past 30 days and is annualized, or
projected forward for the coming year.
- - Average maturity is the average length of time until bonds held by a fund
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a fund's share price will fluctuate in response
to changes in market interest rates.
- - Weighted average quality is an indicator of credit risk. This figure is the
average of the ratings assigned to a fund's securities holdings by
credit-rating agencies. The agencies make their judgment after appraising
an issuer's ability to meet its obligations. Quality is graded on a scale,
with Aaa or AAA indicating the most creditworthy bond issuers and A-1 or
MIG-1 indicating the most creditworthy issuers of money market securities.
The Fund's weighted average quality is based on the market value of the
bonds held by the Fund.
- - Average duration is an estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price
could shift, multiply the fund's duration by the change in rates. If
interest rates rise by one percentage point, the share price of a fund with
an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the fund's share price would rise by about
5%.
<PAGE>
12
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 25%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately 95%, according to Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in U.S. common stocks and bonds, the Fund may make certain
other kinds of investments to achieve its objective. The Fund may invest in
fixed-income securities not in the target index (non-public, investment grade
securities--generally referred to as 144A securities--as well as smaller public
issues or medium term notes not included in the index due to their size). The
vast majority of these securities will have characteristics and risks similar to
those in the target index. The Fund may also purchase money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund,
reduce transaction costs, or add value when these instruments are favorably
priced.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest, to a limited extent, in stock and bond futures
and options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
<PAGE>
13
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $540 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Core Management and Fixed Income
Groups. As of the fiscal year ended December 31, 1999, Vanguard served as
adviser for about $371.4 billion in assets. Vanguard manages the Fund on an
at-cost basis, subject to the control of the Trustees and officers of the Fund.
For the fiscal year ended December 31, 1999, the investment advisory expenses
represented an effective annual rate of approximately 0.01%.
The adviser is authorized to choose brokers-dealers to handle the purchase
and sale of the Fund's securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
<PAGE>
14
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
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PLAIN TALK ABOUT
THE FUND'S ADVISER
The individuals primarily responsible for overseeing the Fund's investments are:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing investment policy and strategy
since joining the company in 1987; has served as the portfolio manager for the
stock portion of the Fund since inception; A.B., Dartmouth College; M.B.A.,
University of Chicago.
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
joining the company in 1981; has been responsible for overseeing the portfolio
management of the bond portion of the Fund since inception; B.A., Lafayette
College; M.B.A., Pennsylvania State University.
FELIX B. LIM, has worked in investment management since completing his education
in 1996; joined Vanguard in January 1999; worked as a credit analyst until
January 2000; B.A. and M.S., University of Pennsylvania (Wharton School).
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
15
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is BALANCED.
<PAGE>
16
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD BALANCED INDEX FUND
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $18.48 $16.29 $13.92 $12.77 $10.34
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .54 .520 .50 .45
Net Realized and Unrealized Gain
(Loss) on Investments 1.88 2.33 2.525 1.26 2.48
-----------------------------------------
Total from Investment Operations 2.46 2.87 3.045 1.76 2.93
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.58) (.54) (.530) (.49) (.45)
Distributions from Realized Capital
Gains (.14) (.14) (.145) (.12) (.05)
-----------------------------------------
Total Distributions (.72) (.68) (.675) (.61) (.50)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $20.22 $18.48 $16.29 $13.92 $12.77
================================================================================
TOTAL RETURN 13.61% 17.85% 22.24% 13.95% 28.64%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to
Average Net Assets 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate 29% 25% 18% 37%* 16%
================================================================================
*Turnover rate excluding in-kind redemptions was 30%.
<PAGE>
17
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $18.48 per share.
During the year, the Fund earned $0.58 per share from investment income
(interest and dividends) and $1.88 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.72 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.46 per share) minus the distributions ($0.72 per share)
resulted in a share price of $20.22 at the end of the year. This was a increase
of $1.74 per share (from $18.48 at the beginning of the year to $20.22 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 13.61% for the year.
As of December 31, 1999, the Fund had $3.1 billion in net assets. For the year,
its expense ratio was 0.20% ($2 per $1,000 of net assets); and its net
investment income amounted to 3.18% of its average net assets. It sold and
replaced securities valued at 29% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
18
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
19
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances. Bonds rated in one of the four highest categories are
considered "investment grade."
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform-- a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Balanced Index Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Fund (including the SAI) at
the SEC's Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act
file number: 811-7023
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I002N-04/07/2000
<PAGE>
PART B
VANGUARD BALANCED INDEX FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 7, 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated April 7, 2000). To obtain, without charge, the
Prospectus or the most recent Annual Report to Shareholders, which contains the
Fund's financial statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE FUND......................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-7
YIELD AND TOTAL RETURN.......................................................B-9
PURCHASE OF SHARES..........................................................B-10
SHARE PRICE.................................................................B-11
REDEMPTION OF SHARES........................................................B-12
MANAGEMENT OF THE FUND......................................................B-12
PORTFOLIO TRANSACTIONS......................................................B-15
FINANCIAL STATEMENTS........................................................B-16
COMPARATIVE INDEXES.........................................................B-16
APPENDIX A--DESCRIPTION OF BOND RATINGS.....................................B-19
DESCRIPTION OF THE FUND
ORGANIZATION
Vanguard Balanced Index Fund is a Delaware business trust. It was originally
organized as a Maryland corporation in 1992, and was reorganized as a Delaware
business trust in July 1998. More than one fund may be offered through the
Trust; currently the Trust only offers the following fund: Vanguard Balanced
Index Fund (the Fund). Throughout this Statement of Additional Information
references will be made to both the Trust and the Fund offered by the Trust.
Prior to its reorganization as a Delaware business trust, the Fund was known as
Vanguard Balanced Index Fund, Inc. The Fund is registered with the United States
Securities and Exchange Commission (the Commission) under the Investment Company
Act of 1940 (the 1940 Act) as an open-end diversified management investment
company. The Fund has the ability to offer additional funds or classes of
shares. There is no limit on the number of full and fractional shares that the
Fund may issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, serves as the Fund's custodian. The custodian
is responsible for maintaining the Fund's assets and keeping all necessary
accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
B-1
<PAGE>
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer and dividend-paying
agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania
19355.
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Fund's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected fund. Unless terminated by reorganization or
liquidation, the Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are noncumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If the Fund fails to meet these requirements
in any taxable year, it will be subject to tax on its taxable income at
corporate rates,
B-2
<PAGE>
and all distributions from earnings and profits, including any distributions of
net tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies as set forth in
the Prospectus.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the Fund acquires a
fixed-income security (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
Federal Reserve member bank with minimum assets of at least $2 billion or a
registered securities dealer, subject to resale to the seller at an agreed upon
price and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until
repurchased. In addition, the Fund's Board of Trustees will monitor the Fund's
repurchase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker, or dealer
party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
and therefore the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other party
to the agreement. While the adviser acknowledges these risks, it is expected
that they will be controlled through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities to qualified
institutional investors (typically brokers, dealers, banks or other financial
institutions) who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms, the structure, and the aggregate amount of such
loans must be consistent with the 1940 Act, and the rules or interpretations of
the Commission thereunder. These provisions limit the amount of securities the
fund may lend to 33 1/3% of the Fund's total assets, and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, a
letter of credit issued by a domestic U.S. bank, or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time and (d) the Fund receive reasonable interest
on the loan (which may include the Fund's investing any cash collateral in
interest bearing short-term investments), any distribution on the loaned
securities and any increase in their market value. Loan arrangements made by the
Fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange (the Exchange), which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of three business days. All relevant facts and
B-3
<PAGE>
circumstances, including the creditworthiness of the broker, dealer, or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES, AND SWAP AGREEMENTS. The Fund may enter into futures contracts,
warrants, options on futures contracts, convertible securities, and swap
agreements for the purpose of simulating full investment in the underlying
Indexes and reducing transaction costs. Futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying financial
instrument are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. Government agency. Assets committed to futures
contracts will be segregated to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold", or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith initial margin deposit in
cash or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with deposits
that may range upward from less than 5% of the value of the contract being
traded. The Fund's initial margin requirement is ordinarily in the form of U.S.
Treasury securities.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its initial margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
B-4
<PAGE>
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund. The
Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. As evidence of this hedging interest, the
Fund expects that approximately 75% of its futures contract purchases will be
"completed", that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund also bears the risk that
the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Fund are engaged in only for hedging
purposes, the adviser does not believe that the Fund will be subject to the
risks of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a
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futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
future positions and subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or of
foreign currencies or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the distributions.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
fund which is not
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subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts the Fund may make or enter into will be subject to the
special currency rules described above.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Fund's investment adviser determines the liquidity of restricted
securities on a daily basis, the Board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the Board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information about the security's issuer.
FOREIGN INVESTMENTS. The Fund will invest in securities issued by foreign
governments, companies, and agencies.
The Fund is, therefore, subject to country risk, which is the possibility
that political events (such as a war), financial problems (such as government
default), or natural disasters (such as an earthquake) will weaken a country's
economy and cause securities issued by entities in that country to lose money.
As foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers, and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of the Fund's
shares means shares representing the lesser of: (i) 67% or more of the Fund's
net asset value, so long as shares representing more than 50% of the Fund's net
asset value are present or represented by proxy; or (ii) more than 50% of the
Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
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COMMODITIES. The Fund may not invest in commodities, except that it may
invest in bond and stock futures contracts, bond and stock options and options
on bond and stock futures contracts. No more than 5% of the Fund's total assets
may be used as initial margin deposit for futures contracts, and no more than
20% of the Fund's total assets my be invested in futures contracts or options at
any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities or by entering into repurchase agreements, lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.
RELATED PARTY TRANSACTIONS. The Trust may not have dealings on behalf of
the Trust with officers and Trustees, except for the purchase or sale of
securities on an agency or commission basis. The Trust may not make loans to any
officers, Trustees, or employees of the Trust.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
None of these limitations prevents the Fund from participating in The
Vanguard Group (Vanguard). As a member of the Group, the Fund may own securities
issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs
or other financial requirement. See "Management of the Fund" for more
information.
Compliance with the investment limitations set forth above is measured at
the time the investment is made, a later change in percentage resulting from a
change in the market value of assets will not constitute a violation of such
restriction.
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YIELD AND TOTAL RETURN
Yields are calculated daily and premiums and discounts on asset-backed
securities are not amortized.
The yield of the Fund for the 30 days ended December 31, 1999 was 3.21%.
The average annual total return of the Fund for the one and five years ended
December 31, 1999 and since November 9, 1992 was 13.61%, 19.13%, and 14.89%,
respectively. Performance figures are not adjusted for the $10 annual account
maintenance fee.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)(1/N)-1
Where:
T = average annual total return.
P = a hypothetical initial investment of $1,000.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T)(N)= ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions.
1.Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the period.
Adjustments may be made for subsequent re-characterizations of distributions.
2.Calculate the taxes due on distributions by the Fund by applying the highest
federal marginal tax rates to each component of the distributions on the
reinvestment date (e.g., ordinary income, short-term capital gain, long-term
capital gain, etc.). For periods after December 31,
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1997, the federal marginal tax rates used for the calculations are 39.6% for
ordinary income and short-term capital gains and 20% for long-term capital
gains. Note that the applicable tax rates may vary over the measurement
period. Assume no taxes are due on the portions of any distributions
classified as exempt interest or non-taxable (i.e., return of capital). Ignore
any potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3.Include all recurring fees that are charged to all shareholder accounts. For
any account fees that vary with the size of the account, assume an account
size equal to the Fund's mean (or median) account size. Assume that no
additional taxes or tax credits result from any redemption of shares required
to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
C = cumulative total return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)(6)-1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments as well as redemption fees for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
The Fund reserves the right to deduct a transaction fee of .08% from an
investor's cumulative purchases over $100 million. The Fund may incur
substantial transaction costs in absorbing very large investments, and the
fee--paid directly to the Fund--is intended to protect existing
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shareholders from being unfairly impacted by such costs. The Fund's adviser will
consider several factors in determining whether to apply the fee, including the
following:
- - The transaction costs of buying securities, determined in part by the
availability of securities at that time.
- - The offsetting effect of any Fund redemptions occurring at that time.
- - The Fund's then current rate of growth.
- - Whether the Fund's corporate substitution strategy provides adequate
additional returns to help offset transaction costs associated with the
large investment under then current market conditions (as discussed in the
prospectus).
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
New York Stock Exchange, generally 4:00 p.m. Eastern time on each day that the
Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(including those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
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The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Index Funds.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange is closed, or trading on the
Exchange is restricted as determined by the Commission, (ii) during any period
when an emergency exists as defined by the Commission as a result of which it is
not reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN,(DOB: 7/29/1954) Chairman, Chief Executive Officer, and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products); Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).
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JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries, Inc. (Machinery/Coal/Appliances), and Newfield
Exploration Co. (Energy); formerly, Director and Senior Partner of McKinsey &
Co., and President of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), The Mead Corp. (Paper Products); and AmeriSource Health
Corp.; and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of the Vanguard Group of Investment Companies which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Trust and the other Trusts in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's net expenses which are allocated among
the funds under methods approved by the Board of each fund. In addition, each
fund bears its own direct expenses such as legal, auditing and custodian fees.
The funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard and the Fund has adopted a Code of Ethics designed to prevent
employees who may have access to nonpublic information about the trading
activities of the Fund (access persons) from profiting from that information.
The Code permits access persons to invest in securities for their own accounts,
including securities that may be held by the Fund, but places substantive and
procedural restrictions on their trading activities. For example, the Code
requires that access persons of the Fund receive advance approval for every
securities trade to ensure that there is no conflict with the trading activities
of the Fund.
Vanguard was established and operates under a Funds' Service Agreement
which was approved by the shareholders of each of the funds. The amounts which
each of the funds has invested are adjusted from time to time in order to
maintain the proportionate relationship between each fund's relative net assets
and its contribution to Vanguard's capital. The Amended and Restated Funds'
Service Agreement provides for the following arrangement: (1) each Vanguard
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fund may be called upon to invest a maximum of 0.40% of its assets in Vanguard
and (2) there is no restriction on the maximum cash investment that the Vanguard
funds may make in Vanguard. At December 31, 1999, the Balanced Index Fund had
contributed capital of $595,000 to Vanguard, representing 0.02% of the Fund's
net assets and 0.60% of Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials, and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of Vanguard. The Trustees and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon relative net assets. The remaining one
half of those expenses is allocated among the funds based upon each fund's sales
for the preceding 24 months relative to the total sales of the funds as a group,
provided, however, that no funds aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency) distribution, and marketing expenses: $974,000,
$1,715,000, and $4,542,000, respectively.
INVESTMENT ADVISORY SERVICES
Vanguard provides investment advisory services to the Fund. These services are
provided on an at-cost basis from a money management staff employed directly by
Vanguard. The compensation and other expenses of this staff are paid by the
funds and funds utilizing these services. During the fiscal years ended December
31, 1997, 1998, and 1999, the Fund paid approximately $80,000, $123,000, and
$205,000, respectively, of Vanguard's expenses relating to investment advisory
services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-15), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the Fund--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
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"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
VANGUARD BALANCED INDEX FUND
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THIS ANNUAL VANGUARD
FROM THIS FUND'S BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUND(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- ---------------------------------------------------------------------------------------------------------------
John C. Bogle (3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $439 $24 $15,000 $80,000
Bruce K. MacLaury $457 $42 $12,000 $75,000
Burton G. Malkiel $443 $40 $15,000 $80,000
Alfred M. Rankin, Jr. $439 $29 $15,000 $80,000
John C. Sawhill $439 $37 $15,000 $80,000
James O. Welch, Jr. $439 $43 $15,000 $80,000
J. Lawrence Wilson $439 $31 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Fund's fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 funds (102 in the
case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999 calendar
year.
(3) Mr. Bogle retired from the Fund's Board on December 31, 1999.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, Vanguard uses its best judgment to choose the
broker most capable of providing the brokerage services necessary to obtain the
best available price and most favorable execution. The full range and quality of
brokerage services available are considered in making these determinations. In
those instances where it is reasonably determined that more than one broker can
offer the brokerage services needed to obtain the best available price and most
favorable execution, consideration will be given to those brokers which supply
statistical information and provide other services in addition to execution
services to the Fund.
The Fund's bond investments are generally purchased and sold through
principal transactions, meaning that the Fund normally purchases bonds directly
from the issuer or a primary market-maker acting as principal for the bonds on a
net basis. Explicit brokerage commissions are not paid on these transactions,
although the purchase price for bonds usually includes an undisclosed
compensation. Purchases from underwriters of bonds typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers typically include a dealer's mark-up
(i.e., a spread between the bid and the asked prices).
The Vanguard Group chooses brokers or dealers to handle the purchase and
sale of the Fund's bonds, and is responsible for getting the best available
price and most favorable execution for all
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transactions. When the Fund purchases a newly issued bond at a fixed price,
Vanguard may designate certain members of the underwriting syndicate to receive
compensation associated with that transaction. Certain dealers have agreed to
rebate a portion of such compensation directly to the Fund to offset its
management expenses. Vanguard is required to seek best execution of all
transactions and is not authorized to pay a higher brokerage commission solely
on account of the receipt of research or other services.
The Fund's adviser evaluates the reasonableness of any commissions paid by
considering: (a) historical commission rates; (b) rates which other
institutional investors are paying, based upon publicly available information;
(c) rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and number of
clients involved; (e) the complexity of a particular transaction in terms of
both execution and settlement; (f) the level and type of business done with a
particular firm over a period of time; and (g) the extent to which the broker or
dealer has capital at risk in the transaction. During the fiscal years ended
December 31, 1997, 1998, and 1999, the Fund paid approximately $70,745,
$139,894, and $141,882 in brokerage commissions, respectively.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Balanced Index Fund's 1999 Annual Report to
Shareholders, and the report thereon of PricewaterhouseCoopers LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
performance, please see the Fund's Annual Report to Shareholders, which may be
obtained without charge.
COMPARATIVE INDEXES
Each of the investment company members of The Vanguard Group, including Vanguard
Balanced Index Fund, may from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard
& Poor's 500 Composite Stock Price Index (S&P 500) with the lowest price-to-book
ratios, comprising 50% of the market capitalization of the S&P 500.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.
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RUSSELL 2000 STOCK INDEX--a subset of approximately 2,000 of the smallest stocks
contained in the Russell 3000, a widely-used benchmark for small capitalization
common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Brothers Corporate Bond Index covering all corporate, publicly issued,
fixed-rate, nonconvertible U.S. debt issues rated at least Baa, with at least
$100 million principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Long-Term Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate
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investment grade bonds rated BBB- or better with maturities between one and five
years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB-or better with maturities greater than ten years. The index
has a market value of over $1.1 trillion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its
investments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
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APPENDIX A--DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. description of its four highest
preferred bond ratings:
AAA--Judged to be the best quality. They carry the smallest degree of
investment risk.
AA--Judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds.
A--Possess many favorable investment attributes and are to be considered as
"upper medium grade obligations".
BAA--Considered as medium grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation description of its four highest
stock ratings:
AAA--Highest grade obligations. Capacity to pay interest and repay
principal is extremely strong.
AA--Also qualify as high grade obligations, a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
A--Regarded as upper medium grade. They have a strong capacity to pay
interest and repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB--Regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. This group is the lowest which qualifies for
commercial bank investment.
Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.
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SAI002-BALANCED INDEX
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